President Donald Trump listens during a cabinet meeting at the White House, Thursday, June 21, 2018, in Washington. (AP Photo/Evan Vucci)
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The unintended target of tax reform: Churches now face 21% penalty

Groups to decide among paying more to feds, cutting employees' benefits or making other sacrifices

By Julian Gregorio - The Washington Times - Tuesday, August 7, 2018

Houses of worship and nonprofit groups are crying foul as they realize that a provision in last year’s tax reform law requires them to pay federal taxes on some employee benefits for the first time, a development that could cost them thousands of dollars.

“Think of it: $13 billion every decade on the backs of churches and nonprofits, hindering their ability to serve their constituents,” said Dan Busby, president of the Evangelical Council for Financial Accountability.

“I’d say the churches have every right to be outraged,” said David L. Thompson, vice president of public policy for the National Council of Nonprofits. “It’s an oxymoron. It’s horrendously unfair.”

The provision was in the legislation that Congress and President Trump signed in December, but for months it flew under the radar while lawmakers wrestled over the main portion of the law: corporate and individual tax cuts.

Now churches, synagogues, universities and nonprofit groups have learned they must pay taxes on employee fringe benefits such as parking and transportation under the 2017 Tax Cuts and Jobs Act. A certain provision calls for a 21 percent tax on some fringe benefits and expenses.

The Tax Cuts and Jobs Act redefines as income some of the fringe benefits that employers pay for employees’ parking spaces or commuting costs. Those benefits now are considered “unrelated business income,” or UBI for short.

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The change means some nonprofit groups must decide among trying to pay more in taxes, cutting employees’ benefits or making other sacrifices. Some churches and nonprofits are pushing back and have started a nationwide petition to repeal the provision.

Mr. Busby said “400,000 houses of worship plus tens of thousands of nonprofit organizations are now paying attention. This issue will not go away until it is repealed.” The council he presides over was founded by the late Rev. Billy Graham’s Evangelistic Association.

Houses of worship are notoriously low on revenue, and many in the D.C. area already have had to cut back on congregant services.

Representatives of D.C. organizations ranging from the Washington Hebrew Congregation to the Washington National Opera said they know about the new tax rule, but scant guidance leaves them with no clue how to calculate what they owe.

In a double whammy, a D.C. law requires employers — including nonprofits — to offer commuter transit benefits, but now federal law taxes those required benefits.

“That’s like taxing a safe workplace,” said Mr. Thompson. “That’s not a fringe benefit. That’s a mandated cost of doing business.”

D.C.-based nonprofits also must pay a 9.4 percent UBI tax to the District of Columbia, as the city follows federal UBI rules by default.

New York, North Carolina and Minnesota also default to federal UBI tax rules. New York’s legislature swiftly passed a bill that eliminates the state-level nonprofit tax, and it awaits Gov. Andrew Cuomo’s signature.

People have been left “scratching their heads,” Mr. Thompson said. Mr. Busby said that thousands of organizations are likely delinquent on IRS payments since most had no idea the provision even exists.

Addressing the issue last week, White House press secretary Sarah Huckabee Sanders said changing the law to ensure churches keep their tax-exempt status is “certainly something that we’re looking into.”

But she defended the tax-code overhaul as providing an economic boost to a broad swath of the U.S.

“I’m not going to make a blanket generalization about every church in America,” Mrs. Sanders said. “But certainly the goal of the tax cuts and reforms package was to provide the greatest amount of relief to the greatest number of Americans, and we feel that it’s done that.”

She said other economic policies promoted by Mr. Trump “have certainly moved the ball forward, made our economy infinitely stronger than it has been in decades.”

Rep. Kevin Brady, Texas Republican and chairman of the House Ways and Means Committee, introduced the Tax Cuts and Jobs Act and has been a whipping boy for nonprofit advocates.

Mr. Brady has insisted the provision is necessary to level the playing field for nonprofits and for-profits.

“These provisions apply to both employers that are taxable entities and those that are tax-exempt entities,” a Brady spokesman said in a statement.

Still, lawmakers on both sides of the aisle aim to snip the unpopular provision. Reps. Mike Conaway, Texas Republican, and Jim Clyburn, South Carolina Democrat, each have introduced a bill that would alter the section that affects nonprofits.

Mr. Clyburn’s bill would increase the corporate tax rate, a poke in the eye for Republicans who supported corporate tax cuts. Mr. Conaway’s bill would repeal the entire section of the law that taxes nonprofits’ employee benefits.

The National Council of Nonprofits has endorsed Mr. Conaway’s bill.

Groups have begged the IRS and the Treasury Department to delay enforcing the provision and for detailed guidance. They still await a response, Mr. Thompson said.